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Friday, February 4, 2011

No where is the old adage "time equals money" more true than in stock options. 2 of the variables used to price options are volatility and time. The further away options expiration is, the more expensive that option is going to be because of the time premium. This premium slowly decays as time marches on and the rate of decay accelerates in the weeks before expiration.

Because somewhere between 75-90% of all options expire worthless, being a net buyer of options might not be the best idea because each day that passes your investment loses value. However, sellers of options benefit from this decay. This is why selling long-dated options on value stocks you own or want to own in the future is a great way to boost your returns. Time is working for the seller of the options and is working against buyers of options.